SEC to Examine Potential Conflicts of Interest at Proxy Advisers

Senior Editor

U.S. securities regulators are planning to take another look at possible conflicts of interests at proxy advisory firms that make annual voting recommendations to institutional investors.

The Securities and Exchange Commission said on Tuesday that it will hold a public roundtable Dec. 5 at its Washington, D.C. headquarters to discuss “the use of proxy advisory firm services” such as Institutional Shareholder Services and Glass, Lewis & Co.

In its statement, the agency noted some proxy firms provide consulting services aimed at helping companies to improve their corporate governance ratings, and said it would discuss transparency issues and conflicts of interest in the proxy advisory industry at the coming roundtable.

AFP

A view of the Securities and Exchange Commission headquarters.

Proxy advisory firms have grown more prominent since the Dodd-Frank Act began requiring annual “say-on-pay” shareholder votes on corporate executive compensation packages. A negative recommendation from proxy advisers can lead to more negative say-on-pay votes from shareholders, so companies have often focused on ways to ensure they get a positive recommendation from the firms.

In a paper last month, professors from Stanford University raised concerns about ISS consulting services that allow companies to pay to learn in advance whether their equity compensation plans would run afoul of the proxy adviser’s rules. The professors said the service was having a large impact on the design of those plans, but companies are bound by contract to keep their use of the service secret. ISS spokeswoman Nancy Adler said the company has a strict Chinese wall that separates its consulting and shareholder advisory units.

The SEC’s roundtable could also resuscitate a 2010 discussion paper where the SEC sought public comment on whether it should consider new rules on transparency and efficiency in the proxy advisory system. Before that, it had been 30 years since the SEC completed a comprehensive review of the proxy system.

MSCI Inc., which owns ISS, said last week that it has hired Morgan Stanley to explore strategic alternatives and possible sale of the proxy advisory unit. ISS will be attending the roundtable, Ms. Adler said.

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